Emily Primeaux, CFE
Associate Editor, Fraud Magazine
A friend of mine recently hosted a wine-tasting party at her home. The premise was simple: bring two bottles of a single varietal that our generous host would bag and number. She gave each of us a numbered sheet of paper and, thankfully, a list of the wines hidden in the bags (in no particular order) to help us during the guessing game. We blindly tasted each wine and then took a guess at the varietal.
Full disclosure: my team and I did terribly. While I’m certain my palate would appreciate a finer wine instead of “two buck chuck,” the evening was certainly a learning experience.
So when I heard only a couple of weeks later that the ACFE’s Austin Chapter would feature “Wine and Fraud” as the topic for their March event, I knew I wanted to learn more. Presented by Cecily Raiborn, CFE, CMA, professor at Texas State University, the session covered the many ways in which wine fraud can be committed.
“We like to think of wine as something pretty and sweet and outstanding,” said Raiborn. “But really, a vineyard is just a farm. A winery is a manufacturing plant and wine is the product.” And she explained that there are at least four ways in which wine fraud can occur.
- Employee theft
At the Kendall-Jackson Winery, a low value placed on accounting was most likely the contributing factor when a service rep stole thousands of bottles and resold them for sporting tickets. He was found out because the bottles he resold weren’t even on the market yet.
- Upstream supply chain
In 1993, Bronco Wine Company and Fred Franzia, one of the owners, were indicted on federal charges of conspiracy to defraud by misrepresenting cheaper grapes as premium Zinfandel and Cabernet Sauvignon.
Franzia lied about where the oak barrels had come from. The problem is that an oak barrel from France will make the wine taste differently than an oak from the U.S. Raiborn explained that one new French oak barrel costs around $1,400, but the fraudster used a U.S. barrel that should’ve cost much less. Of course, he didn’t charge less.
How do you prevent this kind of fraud from happening? Know your suppliers.
- Downstream supply chain
Mark Anderson made headlines in Sausalito when he set fire to a wine warehouse. The wine arsonist was facing embezzlement charges after stealing more than 5,700 bottles of his clients’ collections. He’d take a bottle here and there from the warehouse where he stored wine for wineries and collectors. To cover his tracks, Anderson burned down $6 million of wine.
Unfortunately, because of insurance quirks pertaining to the movement of wine, the affected wineries were unable to claim the loss. Raiborn’s advice in this scenario is to properly insure your property and know your customer.
- Frauds by wineries
Two cases really stood out to me in this example. In one, an Austrian winery added antifreeze to its wine to make it sweeter for their German customers, who prefer a sweeter wine. And in 2008, 20 Italian companies added hydraulic acid, manure and fertilizer to their wines. These attempts to cut costs endangered lives.
According to Raiborn, it’s a little trickier to prevent this kind of tampering. Compositional analysis is an option, but it’s very expensive and most wouldn’t be able to afford the cost. The best control here is to, again, know your supplier.
“But it’s still wine!”
According to Raiborn, 20 percent of wines sold worldwide are counterfeit. Yet the first person ever prosecuted for counterfeiting wine was Rudy Kurniawan in 2013. Why?
Wine fraud goes unreported because the fear of what it will do to the industry is overwhelming. There’s a lack of prosecution because many hire friends and family and don’t want to seek retribution. And worst of all, it may not seem like a big deal. Raiborn said that many fraudsters would argue that at the end of the day, it’s still wine.
The best defense is to employ sound internal controls and to know that even in such a glamorous industry, there are many ways in which people can con others.
Read more about wine fraud in the Fraud Magazine article, “A bitter tasting: Serving up three cases of wine fraud,” by Donn LeVie Jr.